The Effect of Ethical Orientation and Professional Commitment on Earnings
Management Behavior
Author(s): A. C. Greenfield, Jr., Carolyn Strand Norman and Benson Wier
Source: Journal of Business Ethics , Dec., 2008, Vol. 83, No. 3 (Dec., 2008), pp. 419-434
Published by: Springer
Stable URL: https://www.jstor.org/stable/25482387
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Business Ethics
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Journal of Business Ethics (2008) 83:419-434 ? Springer 2007
DOI 10.1007A10551-007-9629-4
The Effect of Ethical Orientation
and Professional Commitment
on Earnings Management Behavior
A. C. Greenfield, Jr.
Carolyn Strand Norman
Benson Wier
ABSTRACT. The purpose of this study is twofold. The
Carpet), and (3) recording the sale of products as
first objective is to examine the impact of an individual's
ethical ideology and level of professional commitment on
the earnings management decision. The second objective
is to observe whether the presence of a personal benefit
affects an individual's ethical orientation or professional
revenue prior to actual shipment (Sunbeam).
However, not all companies engage in aggressive
earnings management behaviors, at least not to the
commitment within the context of an opportunity to
manage earnings. Using a sample of 375 undergraduate
business majors, our results suggest a significant relation
extent of the widely reported cases noted above.
The obvious question is: Why do some managers
choose to participate in egregious earnings man
agement behaviors and others do not? The purpose
decision-making. Further, participants with higher levels
of this study is twofold. Our first objective is to
examine the impact of an individual's ethical ide
of professional commitment seem to be less likely to
ology and level of professional commitment on the
engage in earnings management behavior and less likely
earnings management decision. Our second objec
tive is to observe whether the presence of a per
ship between an individual's ethical orientation and
to behave opportunistically. These results have the po
tential to add to our understanding of certain behaviors in
entry-level personnel and should be of interest to man
agers, practitioners, academicians, and researchers.
KEY WORDS: earnings management behavior, profes
sional commitment, ethical orientation, decision-making,
structural equation modeling
sonal benefit affects an individual's ethical
orientation or one's level of professional commit
ment within the context of an opportunity to
manage earnings. Using a sample of 375 under
graduate business majors, the current study pro
poses a causal model to explain an individual's
decision-making with respect to earnings manage
ment behaviors.
The results of this research suggest a significant
Introduction
relationship between an individual's ethical orien
Earnings management occurs when managers choose
reporting methods and estimates that do not accu
rately reflect their firms' underlying economics
(Healy and Wahlen, 1999). Rosenfield (2000) claims
that GAAP permits earnings management in two
ways. First, GAAP allows businesses to report in
come that has not yet been earned, and second,
GAAP allows stability of income reporting (income
smoothing). Examples of these types of accounting
practices are: (1) shifting debt to offshore holding
companies to inflate income (ENRON), (2)
recording revenues earlier than allowed (Allied
tation and decision-making. Further, the participants
in our study who have higher levels of professional
commitment are less likely to engage in earnings
management practices and less likely to behave
opportunistically. These results should be of interest
to managers, practitioners, academicians, and
researchers. The remainder of the paper proceeds as
follows. In the next section, we provide a review of
the appropriate literature and develop our hypoth
eses. In section three, we describe the methodology
used for this study, and in section four we discuss the
results. The final section summarizes and concludes
the study.
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420 A. C. Greenfield, Jr. et al.
Literature review and hypotheses
development
concern for a universal set of rules or standards.
Idealism focuses on human welfare. An individual's
ethical orientation (relativism vs. idealism) should
Earnings management
affect business decision-making, such as the decision
Over the past several decades, a significant body of
empirical research reports the fact that managers use a
more idealistic should decide not to manage earnings
since that could cause harm to others, an outcome
variety of techniques to manage earnings to accom
they tend to avoid (Forsyth, 1982). These individuals
plish different purposes. For example, Altamuro et al.
(2005) studied accelerated revenue recognition prac
should also judge the earnings management actions
as more unethical (Elias, 2002). On the other hand,
those who tend to be more relativistic consider the
to manage earnings. Individuals who tend to be
tices. Thomas et al. (2004) found evidence of earnings
management using transactions with affiliated com
panies. DeFond and Park's (1997) study results sug
gested that managers use earnings management to
smooth earnings to increase job security. DeFond and
Jiambalvo (1994) concluded that firms approaching
debt covenant violations are more likely to manage
earnings. And Healy (1985) demonstrated that bonus
schemes create incentives for earnings management.
circumstances first rather than the potential harm a
decision might cause. These individuals also tend to
judge decisions more leniently, and as a group, tend
to judge earnings management actions as more
ethical than do the idealists (Elias, 2002).
Barnett et al. (1998) and Davis et al. (2001) used
the EPQ in business contexts, and the results from
each study were generally consistent with prior re
A number of studies focus on the mitigating
search in other disciplines, supporting the notion
influence auditors and audit committees might have
that the EPQ is relevant in business settings. Studies
on earnings management (e.g., Becker et al., 1998;
using the EPQ help explain a variety of decisions
Bedard et al., 2004; DeFond and Subramanyam,
that individuals make in organizations. For example,
1998; Krishnan, 2003). Other researchers use surveys
Shaub et al. (1993) found that auditors who were
and experiments to study the practice of earnings
more relativistic were less likely to recognize ethical
issues in an auditing scenario than were those who
management (e.g., Clikeman and Henning, 2000;
Bruns and Merchant, 1990; Elias, 2002; Kaplan,
2001; Merchant and Rockness, 1994).
However, research has produced scarce evidence
regarding the impact that an individual's ethical
position and professional commitment might have
on the decision to manage earnings. Accordingly,
the present study examines the impact of an indi
vidual's ethical ideology and level of professional
commitment on the earnings management decision.
We also investigate whether the presence of a per
sonal benefit might affect an individual's ethical
orientation or one's level of professional commit
ment within the context of an opportunity to
were more idealistic. Douglas and Wier (2000)
provide evidence that an individual's ethical posi
tion, given opportunity and other incentives, helps
to explain budgetary slack creation behavior.
Douglas et al.'s (2001) results suggest that ethical
orientation is highly (modestly) correlated to ethical
judgments in intense (low) moral conditions for
CPAs. Douglas and Wier (2005) and Redfern and
Crawford (2004) validated the cross-cultural efficacy
of the EPQ, using Chinese managers. Based on this
discussion, we test the following hypothesis and
illustrate this predicted relationship in our research
model for this study (Figure 1):
manage earnings.
HI: There will be a positive (negative) relationship
between relativism (idealism) and earnings
management behavior.
Ethical orientation
Forsyth (1980) developed the Ethics Position
Questionnaire (EPQ) to identify an individual's
ethical orientation, which can be described as a
continuum with relativism at one end and idealism
at the other. Relativism describes an individual's
As discussed earlier, managers might use earnings
management techniques to increase their com
pensation (Healy, 1985) or to preserve their
employment status (DeFond and Park, 1997). Both
of these purposes result in personal benefit to the
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Ethics and Earning Management 421
/Professions l\
jr\Commltment A.
H3:() ^^ - ^\ H4:()
^~| H2:(-) ( Ethical A Hi (+) N Earnings
Personal-*V Po8,tion J-~-* Management
Benefit Ny?-^ Behavior
Idealism Relativism
behalf of the profession, and an explicit g
maintain membership in the profession (Porter
1974). In general, society expects professionals
more committed to their profession than to
personal gain. Shareholder expect manager
employees of an organization to protect the ass
the firm and to make decisions that increas
value; all stakeholders expect certified p
accountants to maintain the public's confidenc
remaining independent of the client and objec
Figure 1. Research Model.
opining on the financial condition of a firm i
annual report.
manager. What is uncertain is whether an individual's
However, in studies where a personal bene
ethical position affects the decision to manage earnings
possible, the extant research reports that professio
to achieve personal benefit. Individuals with a rela
tend to take advantage of the situation to enh
tivistic ethical position would tend to view
theirthese
personal wealth at the expense of the fi
decisions as acceptable (moral/ethical) based on the
suggesting that their professional commitmen
specific circumstances. Therefore, relativistic indi
be in question. Coffee (2005) explains that, d
viduals who would personally benefit from a decision
the 1990s, executive compensation abruptly sh
might be more inclined to manipulate earnings
than
in the
United States from a cash-based system
those who would not personally benefit.
Forsyth
equity-based system and "this shift was not a
(1980) reported that individuals who were highly
panied by any compensating change in corp
relativistic judged a person more favorably who pro
governance to control the predictably perv
duced a positive outcome (by violating a moral stan
incentives that reliance on stock options can c
dard) than someone who produced a (p.
negative
202)." Coffee (2005) illustrates the impact of
outcome (by following a norm). On the other hand,
change as follows. Assume that a CEO holds op
those who were categorized as highly idealistic were
on two million shares of his company's stock,
very critical of individuals who violated a moral
is trading at a price-to-earnings ratio of 30 to
standard, regardless of whether the person obtained a
the CEO can cause the premature recognit
good or a bad outcome (Forsyth, 1980). This suggests
revenues that result in an increase in annual ear
that idealistic individuals should tend to reject an
by $1 per share, the CEO can cause a $30
opportunity to achieve a personal benefitincrease
from an
that would make him $60 million rich
action that might be considered questionable. That is,
Indeed, a number of empirical studies sup
when presented with an opportunity to achieve per
Coffee's (2005) illustration. For example, Bergst
sonal benefit, relativistic individuals should be more
and Philippon (2006) find evidence that the
inclined to do so and idealistic individuals should be
discretionary accruals to manipulate reported earn
less inclined. Accordingly, we test the following
is more pronounced at firms where the CEO
hypothesis and include this relationship in our re
search model in Figure 1.
tential total compensation is more closely tied
value of stock and option holdings. Ronen
report that earnings management distor
H2: There will be a negative relationship (2006)
between
personal benefit and ethical position.
stock price of a firm and it reduces the firm's
because of its unfavorable effect on manager's eff
Although these studies focus on very s
management positions, it is also the case th
Personal benefit and professional commitment
"tone at the top" is very influential througho
organization. As Zablow (2006, p. 26) points
Professional commitment is the acknowledgment
of
"Employees
are very sensitive to situations th
(and trust in) the values and objectives of pact
a profes
their workplace and base much of thei
sion, a willingness to exercise substantial effort
onof the organizational culture on what
ceptions
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422 A. C. Greenfield, Jr. et al.
hear senior management say and, more importantly,
what they see senior management do." Thus, if mid
the profession, and choose to remain in the profes
sion. Further, their results suggest a strong relation
level and lower-level managers observe senior
ship between the auditor's professional and
managers manipulating financial information for
organizational commitment.
personal benefit, they too may be tempted to find
opportunities at their level to personally benefit at
the expense of the organization.
This discussion suggests that professional com
mitment is an important factor in influencing an
This discussion suggests that managers at any level of
higher levels of professional commitment are asso
ciated with positive behaviors that are beneficial to
the organization, when presented with the possibility
individual's behavior in a business context. That is,
for personal gain, may sacrifice professional commit
an organization. Accordingly, individuals with
ment. We use the following hypothesis to examine this
higher levels of professional commitment should be
less likely to engage in activities that are detrimental
to a firm, such as earnings management behavior.
viewpoint, and our research model (Figure 1) indicates
the relationship that we predict between personal
benefit and professional cornmitment (H3).
H3: There will be a negative relationship between
personal benefit and professional commitment.
Professional commitment and earnings management
Jauch et al. (1978) tested professional commitment
in an academic environment and found a positive
relationship between the professional commitment
(PC) of professors and the number of articles pub
We use the following hypothesis to test this possi
bility, and our research model (Figure 1) indicates
the relationship that we predict between professional
commitment (H4) and earnings management.
H4: There will be a negative relationship between
professional commitment and earnings man
agement behavior.
Research methods
lished. Aranya et al. (1981) adapted Porter et al.'s
Participants and task
(1974) organizational commitment scale to examine
PC of accountants as that relates to organizational
Senior-level business students (n = 376) from one
commitment and level of responsibility in the
mid-Atlantic university and two mid-Atlantic liberal
organization. Their results indicated that partners
and sole practitioners possess the highest level of PC.
Further, those individuals with the highest PC also
had the highest organizational commitment.
arts colleges in the U.S. participated in this study. To
Bamber and Iyer (2002) reported a positive rela
tionship between an auditor's professional and
organizational identification (commitment), and
test for the effect of one's ethical orientation on
earnings management behavior, we adapted the sce
nario used in the Clikeman and Henning (2000)
study. Our adaptation resulted in two versions of the
scenario, one has an opportunity to achieve a personal
benefit while the other does not (see Appendix).
Leong et al. (2003) discovered the same results for a
sample of Canadian chartered accountants. Hong
Kong accountants with higher levels of professional
commitment are more inclined to overcome issues
associated with inter-role conflict and remain on the
job (Lui et al., 2001), and are more inclined to ob
serve the rules of the profession (Jeffery and
Weatherholt, 1996).
Similarly, Shaub et al.'s results (1993) indicate that
auditors whose ethical orientation was high in ide
alism had a higher level of professional commitment.
The authors conclude that these individuals should
be more likely to believe in and accept the values of
the profession, exert considerable effort on behalf of
Variables of interest
Ethical Position (EP). We used the Ethical Position
Questionnaire (EPQ), developed by Forsyth (1980),
to measure each participant's ethical orientation.
The questionnaire consists of twenty questions, ten
each for idealism and relativism. Factor analysis of
the twenty items resulted in two factors, and we used
those factor scores in subsequent analyses. Cron
bach's alpha reliability scores for the ten-item ide
alism and the ten-item relativism measures are 0.84
and 0.80, respectively.
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Ethics and Earning Management 423
Professional Commitment (PC). The fifteen-item
measure previously validated by Aranya et al. (1981)
was adapted for this study to measure professional
commitment (factor and reliability analyses resulted
in a seven-item measure of the latent PC construct).
for 61.3% (230) of the participants. We believe that
these participants are an appropriate proxy for entry
We used a five-point Likert-type scale to denote the
level of agreement or disagreement with each item.
51 years. For work experience, 47.1% had five or
more years of experience; however, 50 participants
Reliability is acceptable (Cronbach's a = 0.81).
had 10 or more years. Seventy-five participants
level accountants and managers, based on the age
and experiences of many of our participants. The
average age is 24.0 years with a range of 18 to
Personal Benefit (PB). Our scenario had two
versions - one version allowed participants to
indicated that they have been in their current posi
tion for five or more years. This is not surprising,
achieve a personal benefit by managing earnings,
given the fact that one of the schools in this study is a
while the other version did not. That is, the personal
large, urban university with a very large, non-tra
benefit opportunity was either absent or present.
ditional age student population (many work full
time and take classes only in the evenings). The
participants reported that 31.3% work for a small
The present condition included an opportunity to
increase both personal income and company in
come. The absent condition only included the
opportunity to increase company income.
firm, 28.6% are employees in a medium-sized firm,
and 32.4% are employed by a large firm. The type of
businesses in which they work also varied; 23.2% in
a retail firm, 63.5% in a service firm, and 5.6% in a
Results
manufacturing firm.
Manipulation checks and descriptive statistics
Descriptive statistics for the variables appear in
Panel B of Table I. Earnings management behavior
Pany and Reckers (1987) note that a manipulation
check is important in between-subjects designs be
is the dependent variable and was measured using a
seven-point Likert-type scale with a minimum re
sponse of one, denoting strong opposition to post
cause insignificant results can occur for several rea
sons: (1) because a statistically significant effect does
not exist, or (2) because participants did not
ponement of the expenses and a maximum of seven,
denoting strong support for postponement. The
mean response was 4.05 and the standard deviation
understand, or realize, the information that the re
was 1.73.
searcher was manipulating. Two questions were
Since the participants attended three different
schools (75% from a large mid-Atlantic university
and 25% from two small mid-Atlantic colleges), we
used a dummy variable for university to test whether
our results were influenced by differences inherent
included in the exit questionnaire (Appendix, Part
III, questions three and four) as manipulation checks
for the present study. The first question checks
whether the participants understood that mainte
nance expenses were (or were not) incurred in the
present year, and the second question checks whe
ther the participants understood that the decision
regarding maintenance expenses affected their in
come. The results of the manipulation checks indi
cate whether respondents understood the issue of
maintenance costs (x = 3.767, p = 0.048), and
whether they would personally gain from the deci
sion to postpone maintenance expenses (% = 4.409,
p = 0.036).
in the educational institutions. Using ANOVA, no
significant differences in the mean responses of the
participants for earnings management behavior ex
isted (F-statistic = 0.398, p = 0.218). In addition,
we examined a structural equation model to ensure
that no differences existed based on the differences in
universities (large/small university). The path anal
ysis results of the two structural equation models
were qualitatively similar.
Panel A of Table I presents the demographic data.
There were 203 male respondents (54.0%) and 173
female participants (46.0%). Accounting majors
comprised 38.7% (145) of the sample while their
We evaluated ten goodness-of-fit indices for the
counterparts, the non-accounting majors, accounted
structural equation model used in this study, as well
Model fit
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424 A. C. Greenfield, Jr. et al.
TABLE I
Summary information
Panel A: Demographic Information
Mean (Std. Dev.):
Age 24 (5.8)
Years experience in current position 2.94 (3.4)
Total years work experience 5.10 (4.6)
Percent in each category:
Male/Female 54.0/46.0%
Accounting/Non-accounting majors 38.7/61.3%
Work experience <5 years/>5 years 52.9/47.1
Retail/Service/Manufacturing firm 23.2/63.5/
Small/Medium/Large firm 31.3/28.6/3
Panel B: Variables
Variables Min. Max. Mean Std.
Earnings management behavior 1 7 4.05 1.73
Professional commitment 13 33 24.93 3.48
idealism 13 50 37.04 6.86
Relativism 10 46 31.30 6.79
considered
as the x -ratio. Figure II presents those indices
as a good fit. In this study, the ob
CFI
is
0.97.
The Bentler-Bonett Normed Fit
well as acceptable criteria for each index. According
and 5the Bentler-Bonett Non-Norm
to Joreskog and Sorbom (1989), a #2-ratio (NFI)
less than
Indexthat
(NNFI) are more sensitive to sampling
indicates a moderate fitting model, while ratios
sensitive to sample size. These indi
approach 1 indicate good fitting models.but
Theless
ratio
quire a minimum score of 0.90 for a good fit (f
for our model is 1.525 (p = 0.017). The unexplained
NFI = 0.92, NNFI = 0.96). Other
variance in the model is denoted by thestudy,
Average
tests from the SEM literature in
Absolute Standardized Residuals (AASR) ness-of-fit
(Bender,
Index (GFI), Adjusted Good
1990). For a model to be considered a goodGoodness-of-Fit
fit, the
AASR should be less than 0.05, as is the case
in this
of-Fit
Index (AGFI), and Bolen Incremen
Index (IFI).
Each of these tests requires a
study (AASR = 0.03). The Root Mean Square
Er
greater
ror of Approximation (FJV1SEA) allows for
the calthan 0.80 to indicate a moderate fit
culation of confidence intervals, and a score
of less score of 0.90 to indicate a good mod
minimum
and
than .05 indicates a good fitting model.(Hu
The
ob Bender, 1999). The indices for this
served RMSEA for our model is 0.04. were
The Stan
GFI = 0.97, AGFI = 0.95, and IFI = 0
dardized Root Mean Square Residual (SRMR)
should be used in conjunction with RMSEA and
Sensitivity
CFI (Hu and Bender, 1999). A score of .08
or less analyses
indicates a good fitting model, as is the case in this
reason for the pervasive use of stru
study (SRMR = 0.04). The Comparative One
Fit Index
modeling is that it provides research
(CFI) is less sensitive to both sample sizeequation
and sam
comprehensive
method for the quantificati
pling error, ranging from 0 to 1 (Hu and Bender,
testing
1999). This test requires a score greater than
0.80 forof competing theories (Rayko
the model to be deemed a moderate fit, and
0.90 is
Marcoulides,
2000). Accordingly, we perf
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Ethics and Earning Management 425
sensitivity analysis (Anderson and Gerbing, 1988;
Byrne, 1994) to determine whether superior models
would obtain from plausible alternative paths not
hypothesized in this study. These models included a
direct path from the benefit manipulation to earn
ings management behavior, a direct path from eth
ical position to professional commitment, a direct
path from professional commitment to ethical posi
tion, and combinations of these non-hypothesized
paths. Based on the studies reported in our literature
review (e.g., DeFond and Park, 1997; Healy, 1985),
we anticipated that we would find a significant path
between personal benefit and earnings management
behavior, but this was not the case. Furthermore,
for the personal benefit treatment group being
stronger. Finally, the coefficient for the relativism
measured variable was significantly higher than that
for idealism (p = 0.002). As in the full model, the
observed earnings management outcome is signifi
cantly related to the individual's ethical position.
As an additional analysis, we tested an ANOVA
model with personal benefit as an independent
variable and found that this variable was not signif
icant; however, the ethical orientation of relativism
was significant (t - 3.67, p < 0.001). These sensi
tivity analyses suggest that, although prior studies did
although the present study operationalized ethical
not consider the effect of one's ethical position on
earnings management, ethical position might offer
an important perspective in understanding earnings
position differently than Shaub et al. (1993), we
management.
anticipated a significant path between ethical posi
tion and professional commitment but did not find
one. None of these alternative models was superior
to the hypothesized model.
In addition, we partitioned the participants by the
treatment group of personal benefit and then com
pared the resulting models: one for personal benefit
present and one for personal benefit absent.3 Each
model has a direct path from ethical position to
earnings management behavior and a direct path
from professional commitment to earnings man
agement behavior. We evaluate the separate models
using the same fit statistics as for the full model. The
?4
Tests of hypotheses
We assess the first four hypotheses based on their
respective coefficient path values in the structural
model and present those results in Figure 2. All
hypothesized paths were significant (p < 0.05).
Hypothesis la predicts that an individual with a
more idealistic ethical orientation will be less likely
to engage in earnings management behavior, and the
observed path coefficient (-0.04) is significant and
supports this hypothesis. Similarly, Hypothesis lb
SEM model results for the no personal benefit
predicts that an individual with a relativistic ethical
treatment are: #2-ratio = 1.68; AASR = 0.04;
orientation will be more likely to engage in earnings
RMSEA = 0.06; SRMR = 0.06; CFI = 0.94;
NFI = 0.87; NNFI = 0.91; GFI = 0.95; AGFI 0.91; and IFI = 0.94. Similar results are obtained
for the personal benefit treatment. Model statistics
include: /-ratio = 0.63; AASR = 0.03; RMSEA =
0.06; SRMR = 0.05; CFI = 0.96; NFI = 0.91;
NNFI = 0.94; GFI = 0.96; AGFI = 0.92; and
IFI = 0.96.
Next, we tested the difference between the cor
management behavior, suggesting a positive rela
tionship between relativism and earnings manage
ment behavior. The significant path coefficient
(0.33) supports hypothesis lb. These results are
consistent with Douglas and Wier (2000) who found
that individuals with a relativistic (idealistic) ethical
orientation were more (less) likely to engage in
budgetary slack creation.
We also found support for Hypothesis 2 that
responding path coefficients to determine whether
the results per treatment group were consistent with
predicted a negative relationship (?0.08 coefficient)
the full model. There was no significant difference
between the professional commitment to earnings
entation. Practically speaking, this result suggests that
management behavior path (p = 0.45). However,
there was a significant difference between the no
treatment group and the treatment group in the
in the presence of an opportunity to personally
benefit from a business decision, tend to move to
positive path coefficients between ethical position to
earnings management behavior (p = 0.03) with that
between personal financial benefit and ethical ori
the individual who tends to be more idealistic will,
ward a more strongly idealistic position. That is, the
idealistic person seems to sense the ethical dilemma
inherent in the decision and adopt a stronger
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426 A. C. Greenfield, Jr. et al.
/Professional^
v^y ^?^ r^i
^^M Commitment K.
~~I . I I-1 r Ethical A ,-. Nl Earnings
-
I-^-.04 r
.33
-1
-
Idealism Relativism
Figure 2. Structural equation model results (All path coefficients are significant at p< 0.05).
Goodness-of-fit indices for structural equation model
Goodness-of-fit index Score Minimum
Chi-square ratio 1.525 <5.0
Average Absolute Standardized Residuals (AASR) 0.03 <0.05
Root Mean Square Error of Approximation (RMSEA) 0.04 <0.05
Standardized Root Mean Square Residual (SRMR) 0.04 <0.08
Comparative Fit Index (CFI) 0.97 >0.80
Bentler-Bonett Non-Normed Fit Index (NNFI) 0.96 >0.90
Goodness-of-Fit Index (GFI) 0.97 >0.90
Adjusted Goodness-of-Fit Index (AGFI) 0.97 >0.90
level of
professional commitment suffer
conviction to avoid this potential problem.
Given
the same set of circumstances, the individual
presencewho
of a potential personal benefit. Hy
4 is tend
supported
as revealed by a significan
tends to be more relativistic will apparently
to
(?0.06)
coefficient.
favor the positive consequences (personal benefit)
that are possible, which tends to strengthen their rela
tivistic position. These results are generally in line with
Additional
analysis ? Years of experience and age
the findings that Forsyth (1980) reports,
and these
results are intuitively appealing based on prior re
search (e.g., Shaub et al., 1993, DouglasThis
and study
Wier, assumes that participants are
proxieswith
for "entry-level" managers. Howe
2000), where individuals, when confronted
other business dilemmas, tended to reinforce
their
standard
deviation for years of work experie
ethical orientation.
age of these students prompted us to e
comparisons of these two demographic varia
Hypothesis 3 predicted a negative relationship
determine
between the level of professional commitment
and what (if any) differences m
Accordingly, we split our sam
earnings management. The significant apparent.
path coeffi
two groups
cient (-0.03) for the professional commitment
to based on years of experience
pared those
earnings management behavior path supports
the with less than five years of exp
(n suggests
= 200) to those with greater than or
hypothesis. Practically speaking, this result
five years
that the lower an individual's professional
com of experience (n ? 166). The re
qualitatively
similar to the results rep
mitment, the more likely is the person
to engage
2, with one exception. The path coef
in earnings management behavior. Figure
Similarly,
between
Commitment and E
Hypothesis 4 predicted that an individual's
levelProfessional
of
Management
professional commitment is negatively
related to Behavior is positive and sign
(0.10) for those with less than five y
personal benefit, which implies that an individual's
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Ethics and Earning Management 427
experience. This interesting result is not apparent in
Prior research (e.g., Bruns and Merchant, 1990)
suggests that managers have a high tolerance for
operating manipulations, but they exhibit no con
our analysis of the full sample. This finding suggests
sensus regarding which ones are acceptable (moral
that participants who have more years of work
experience, and higher Professional Commitment
scores, are less likely to participate in earnings
or ethical), which suggests that one's ethical judg
ment may have an important impact on the deci
experience, but is negative and significant (?0.17)
for participants with five years or more of work
sion to manage earnings.
management relative to those participants who have
The purpose of our study was to examine factors that
less than five years of work experience. This is
intuitively appealing in that we would anticipate
more seasoned employees, who are committed to
their profession, would be more conscientious
may help explain earnings management behavior of
about performance of their responsibilities relative
vidual's ethical ideology have an impact on decisions to
certain individuals. In particular, we designed an
experiment to investigate three areas of interest
regarding earnings management. First, might an indi
to more junior employees. We obtained nearly
engage in earnings management behavior? Second, is it
identical results when we split the sample based on
age (0.12 for those who were less than 22 years of
possible that an individual's level of professional com
mitment might affect his or her decision to manage
age, and -0.21 for the older group), which is not
earnings? And third, in the presence of a personal
surprising since years of work experience and age
are often highly correlated.
benefit, do ethical orientation and the level of profes
sional commitment affect an individual's inclination to
participate in earnings management?
Discussion and conclusions
The primary contributions of this study were the
discovery that one's ethical orientation mediates the
impact of personal benefit on earnings management
The purpose of Generally Accepted Accounting
behavior. Although prior research (e.g., Healy
accounting and reporting procedures for managers to
(1985) and DeFond and Park (1997)) suggest that
personal benefit mostly explains an individual's
Principles (GAAP) is to identify acceptable
use when they prepare accounting information for
parties external to the firm. While these principles
offer managers a measure of latitude in the choices
they may make to present financial information to
interested, outside parties, the clear expectation is
that company management will use professional
discretion and integrity to select the principles and
standards that most accurately reflect the financial
condition of the firm.
The extant research on earnings management
reports that managers use a variety of techniques to
manage earnings to accomplish different objectives.
inclination to participate in earnings management,
we find that one's ethical position might be
equally, if not more, important in understanding
earnings management behavior. In particular, the
more relativistic an individual's ethical orientation,
the more likely he/she is to engage in earnings
management practices. Conversely, the more ide
alistic an individual's ethical orientation, the less
likely he/she is to engage in earnings management
behavior. Further, individuals with a higher level of
professional commitment are less likely to engage in
earnings management practices while individuals
Those objectives may be categorized as a personal
with a lower level of professional commitment are
benefit or a company benefit (or both). By adapting
more likely to engage in earnings management
behavior.
Clikeman and Henning (2000), we make the dis
tinction of whether the benefit is only for the
benefit of the company or both. This offers us the
opportunity to isolate personal benefit in our study
and focus on this incentive to observe how per
sonal benefit might impact ethical orientation and
ultimately earnings management behavior. That is,
do ethical orientation mediate the impact of per
sonal benefit on the decision to manage earnings?
This study extends our understanding of earnings
management behavior by investigating the impact that
an individual's ethical position might have on the
decision to engage in managing earnings, within
the acceptable limits defined by GAAP. The present
study also examines the complex combination of eth
ical orientation and professional cornmitment, in the
presence of a personal benefit, to extend the boundaries
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428 A. C. Greenfield, Jr. et al.
of our current knowledge of the likelihood of man
agers to engage in earnings management.
Overall, these results may be helpful to manag
ers, practitioners, academicians, and accounting
research
ers. With a better understanding of the potential
impact of an individual's ethical orientation and
professional commitment on earnings management
behavior, all interested parties are in a better posi
tion to suggest possible remedies and solutions to
mitigate these behaviors. Senior managers might
consider their organizational architecture (decision
right assignment, performance-evaluation system,
and reward system) and whether these factors
minimize agency problems. Further, managers
might wish to review their policies and procedures
with respect to ethics, codes of conduct, and
acceptable behavior within the firm. Business pro
fessors might wish to include more classroom
Some of the limitations in the present study
possibilities for future research. Due to the h
geographical region of the sample, an ext
might be to replicate the study using student
other geographic regions as proxies for entry
managers. The ability to generalize the results
study could be further strengthened by testing e
level managers as well as experienced mana
examine possible differences in level of profes
commitment and ethical orientation, based on
of work experience or on the level of profess
responsibilities in the firm. The results of such a
could inform future research studies and enl
the socialization process that occurs as indi
progress in their profession. Another potential
interest for future research is to examine a va
different groups of managers, based on diffe
such as public and private accountants, corpor
governmental (or not-for-profit) managers, or
examples and homework assignments that focus on
similar combinations of professionals. Finally,
research might continue to explore the link b
ethical situations and appropriate decision-making
choices; researchers should consider including eth
ical position in future studies of earnings manage
ethical position and professional commitment.
ment.
Notes
The results of this study should be interpreted
within the context of the following limitations. One
such limitation relates to the participants used in this Porter et al.'s (1974) organizational commitment
scale contains 15 items that are designed to measure the
experiment. The undergraduate students who par
ticipated in this experiment came from three mid degree to which an individual feels committed to his/
her organization. Aranya et al. (1981) modified this 15
Atlantic universities in the U.S. Although these
item scale by substituting profession or professional for
educational institutions have diverse student bodies,
organization so that the scale measures professional
they are all located in the same region and may not
commitment rather than organizational commitment.
be representative of students from other geographical Relativism and idealism are opposite ends of a con
areas or countries. Further, this study suggests thattinuum, and ethical position is based on the relationship
the participants proxy for entry-level accountantsbetween the two dimensions. We reverse scored the rel
and managers. Although we believe that theativism questions to allow for a single measurement of
demographics of our participants help mitigate thisreliability of the ethical position latent construct. The
overall ethical position reliability measurement (Cron
concern, we acknowledge that entry-level personnel
(who are not currently undergraduate students)bach's alpha = .7526) confirms the constructs reliability.
might differ in their decision-making. The experi We gratefully acknowledge an anonymous reviewer
mental case used in this study may also be a limita
for suggesting this test.
We also performed ANOVAs using age (F = 1.961;
p = 0.070), gender (F = 1.046; p = 0.395), and experi
themselves in the role of the vice president of the
ence (F = 1.483; p = 0.183). For our sample, none of
company. Since the study participants did not make
these are significant at the .05 level although we could
the decisions in an actual business environment, the
argue a modest age effect. Post hoc comparisons for age
tion in that we asked the participants to place
possibility exists that they did not take the situation
revealed no significant differences using either Bonfer
seriously. Thus, when faced with a real-life situation
roni or Scheffe multiple comparison procedures.
the respondents may or may not act in the same We thank an anonymous reviewer for this helpful
manner.
suggestion.
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Ethics and Earning Management 429
Appendix
released earnings forecasts. The chief executive
officer is worried that failure to achieve forecasted
profits will severely hurt the company's stock price
and bond ratings.
PART I: Please read the following information and then
answer the related questions. There are no right or wrong
This year in an effort to achieve forecasted profits,
answers; we are only interested in your decision as well as
the company is considering postponing all mainte
your opinions.
nance scheduled during the last two weeks of
December until March of the following year. The
cost of the maintenance will be about the same, but
Case Material
current year income and your compensation will be
increased because no expenses will be incurred
You are the executive vice president of a publicly
held manufacturing company. Your company closes
during the last two weeks of December each year
for a winter holiday. During these two weeks
extensive maintenance is performed on the manu
facturing equipment. The maintenance is expen
sive, but has always been recorded as a normal
operating expense in the past because of its recur
during December. (We modified the Clikeman and
Henning (2000) scenario to manipulate personal
benefit. In the narrative above, we included the
words in bold (and your compensation). The alter
nate scenario was worded as follows: Although current
year income will be increased because no maintenance ex
penses will be incurred during December, this will have no
effect on your compensation.)
Please indicate your support for or opposition to
ring nature.
the proposal to delay the maintenance until the
Due to a downturn in the economy, your com
following year.
pany's profits are significantly lower than previously
(Please Circle One)
Neither
Strongly Slightly oppose nor Slightly Strongly
oppose Oppose oppose support support Support support
postpone- postpone- postpone- postpone- postpone- postpone- postpone
ment ment ment ment ment ment ment
12
PART
3
4
5
6
7
II:
Youextent
will
find
a
to
wh
Answer
these
ques
statements.
P
experience
and
opinions.
Y
indicate
the
below.
some
items
and
agree
with
circling the number
corresponding to your feelings,
where:
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430 A. C. Greenfield, Jr. et al.
Strongly Moderately Neither agree Moderately Strongly
disagree disagree nor disagree agree agree
12
3
4
5
1.
I
am
willing
to
beyond
that
norm
make
my
profe
2.
I
as
talk
up
this
a
great
profe
3.
I
feel
very
4.
I
would
lit
accep
assignment
in
areas
that
are
or
as
profession.
12
5.
I
find
that
profession's
6.
I
am
part
7.
I
m
valu
proud
of
this
could
to
pro
just
a
another
professio
of
organization
was
8.
similar.
Being
really
in
9.
mem
inspires
the
It
a
way
would
th
of
jo
take
my
present
me
to
work
associated
12
circ
ar
in
with
t
10.
I
am
extreme
profession
over
considering
at
t
11.
by
There's
not
sticking
with
indefinitely.
12.
Often,
I
find
this
profession's
matters
relating
13.
I
really
14.
For
care
profession.
to
be
me
a
12
this
15.
Deciding
to
was
a
definite
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i
membe
b
m
Ethics and Earning Management 431
Strongly Moderately Neither agree Moderately Strongly
disagree disagree nor disagree agree agree
12
16.
3
A
their
4
5
person
sho
actions
nev
another
17.
even
Risks
to
tolerated,
of
how
18.
is
The
to
anot
irrespe
small
th
existence
always
wrong,
benefits
to
be
g
19.
One
should
n
physically
harm
20.
One
might
should
in
any
welfare
21.
If
an
other,
of
n
way
anot
action
then
it
c
sh
22.
Deciding
whe
act
by
balancing
of
of
the
the
23.
The
should
in
act
act
agains
is
imm
dignity
be
any
the
a
mo
society.
24.
It
is
never
ne
welfare
of
othe
25.
Moral
match
26.
so
There
any
What
and
28.
are
important
of
27.
action
ideals
no
that
code
is
of
ethic
society
Moral
of
to
a
standa
individualistic;
w
to
be
moral
may
by
another
29.
Different
compared
as
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per
typ
to
432 A. C. Greenfield, Jr. et al.
Strongly Moderately Neither agree Moderately Strongly
disagree disagree nor disagree agree agree
12
3
4
5
30.
Questions
can
never
be
moral
or
of
w
reso
immora
31.
Moral
standard
rules
which
indic
should
in
32.
behave
making
Ethical
and
judgm
conside
relations
are
so
co
should
be
allowed
individual
code
3
3.
Rigidly
codify
prevents
certain
t
stand
in
the
relations
34.
No
way
and
rule
o
adju
conce
formulated;
wheth
or
not
permissible
the
situation.
1
35.
Whether
a
lie
immoral
depends
circumstances
PART
III:
s
Demograp
ID#_
1. In what year were you born?_
2. Gender: _M _F
3. In the scenario you just read, were maintenance expenses incurred in December?
_Yes _No _Don't remember
4. In the scenario you just read, was your income affected by the maintenance expense dec
_Yes _No _Don't remember
5. What is the highest degree you've attained: _
6. What was/is your undergraduate major:_
7. How many years of experience do you have in your current position:_
8. How many total years of experience do you have: _
9. Industry classification of present employer: _Retail _Service_Manufacturing
10. What is the size of the entity for which you work (based on the typical criteria f
industry)?
_ Small _Medium _Large
Is there anything you would like to comment on? Use the space below for your comments.
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Ethics and Earning Management 433
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